This post has been self-published on Youth Ki Awaaz by IMPRI Impact and Policy Research Institute. Just like them, anyone can publish on Youth Ki Awaaz.

GST Conundrum: Impending GST Compensations To State Govt. Need To Be Made Available

More from IMPRI Impact and Policy Research Institute

Since 2017, India has been governed by a single tax regime with the introduction of Goods and Services Tax (GST) after almost two decades of deliberations and hard work. It has facilitated the unification of the Indian market by allowing free movement of goods and services across the state borders which, earlier, acted as the major barriers in such mobility.

History of GST
History of GST in India

The multiple tax rate slabs for different categories of the product, processes glitches, and inadequate IT infrastructure, exclusion of alcohol, electricity, real estate, petroleum, and slowing down of the growth rate have made this system more complicated over time. GST system has found itself in a very awful situation following the COVID-19 pandemic and ensuing economic downturn prevailing in India. 

The states have now started to claim their share of compensation from the union government which, albeit surprisingly, has expressed its inability to pay the compensation to states due to the revenue foregone and current financial constraints.

The government of Kerala has even defined this denial as a “betrayal of trust”. With this background, Impact and Policy Research Institute (IMPRI), New Delhi organized a webinar and panel discussion- The GST Conundrum: State of India’s Indirect Taxation System in the Times of COVID-19 Pandemic and Recession, on September 11, 2020.

Prof Atul Sarma, Distinguished Professor, Council for Social Development (CSD), New Delhi highlighted that the taxation system before GST was not efficient because of the multiple nature of taxes. This coupled with different slabs has dented the revenue earning potentials of the states and thereby, hindering the development of the Indian economy. GST, as an alternative tax regime, has featured in policy discussion since the 1950s. A taskforce established in 2003 headed by Prof Vijay Kelkar and the Union Budget of 2006 proposed a GST. After prolonged and in-depth deliberations with the state governments, the Government of India finally introduced the GST or the One Nation One Tax, on July 1, 2017.  

In the process of consultation of states, there was an amendment to compensate the states to the extent of shortfall over 15% of overall tax through the cess to be levied on sin goods. But the compensation mechanism has not yielded an adequate amount of tax proceeds. The maximum amount that can be processed is about Rs 90000 crore, whereas, the requirement stands at Rs 2.35 lakh crore.

The Union government has subsequently suggested two alternatives to states which are being faced with opposition by states. Prof Sharma expressed his concern for the fiscal health of the Union government in the wake of COVID-19 and the attendant unwillingness of the government in compensating the states from the Consolidated Fund of India. He opined that GST was pushed hurriedly with very little attention being accorded to building the IT infrastructure necessary for GST implementation.

Prof Rajeev Gowda, Ex-Member of Parliament, eminent academician, public intellectual, and politician highlighted that the then finance minister Shri Arun Jaitley projected a 14% increase in tax revenues every year with the implementation of GST, which he thinks was a very unrealistic assumption. He also pointed out two crucial aspects: firstly, there was a surplus in the collection of taxes because the cess was levied on demerit goods and the Union government absorbed this surplus into its own resources.

Secondly, when states raised their concern about any future shortfall of tax collections, then the Union government ensured them of due compensation. But Union government’s recent announcement regarding their inability to compensate is clearly antithetical to the constitutional amendment of the GST Compensation Act.

He opined that states are at the forefront in fighting COVID-19, but they have not been allocated enough resources, not even the constitutionally mandated compensation on account of shortfall in tax revenue. So, the states are essentially left with two options – either to cut capital expenditure or to borrow.

In the case of borrowings, the state will have an indirect sovereign guarantee on their loans, unlike the centre which has the better capacity to borrow at lower rates as well as repay their loans. So, one possibility could be to borrow in one tranche and then allot the same among the states according to the Finance Commission formulae.

Moreover, the Union government can raise loans from multilateral institutions, monetize public sector undertakings, and so on. He stated that the response by the central government to the state’s losses demean the ethos of federalism. He further mentioned that even before the pandemic when petrol prices were lowered in the country, the states had to bear the brunt of cesses.

All these signify the gross mismanagement of the federal fiscal structure of India. He remarked that the states may start introducing emergency surcharges to raise resources and some states would borrow and pay off debts over a course of time.

Prof R. Kavita Rao, Director (acting) and Professor, National Institute of Public Finance and Policy (NIPFP), New Delhi highlighted that initially the compensation package was designed in a generous manner to encourage states to accept the new tax regime for the first five years. Thereafter, the issue of stabilization of the GST system and revenue-neutral system was expected to be tackled between centre and states, however, the current pandemic has brought the parties to face a very tough reality.

The Union government underwrites the potential losses since resources can be raised from anywhere to meet the shortfall. Recent financial downturn reduces the revenue of the governments, and, at the same time, increases the compensation requirements of the state governments. One way to meet the revenue shortfall is to increase the cess rate which could, however, be ineffective during an economic crisis.

Prof Rao expressed her concerns about the plausibility of financial support from the Union government to the states in dealing with the revenue shortfall after the expiry of the five-year compensatory period. COVID-19 has only preponed this scenario. Prof Rao also highlighted that rates under GST have undergone changes many times during its three years of implementation and, therefore, hardly have time to settle into a structure and compliance system.

Even the voting rights have been constructed in such a manner that neither state nor the Union can unilaterally change the GST rate. In practice, the Union and the state governments have passed their own laws, but lack of uniformity pervades the entire set of laws. 

She suggested that in the current scenario since the indirect tax has a regressive effect on demand and purchasing power, a reduction in GST should be borne by the CGST component while keeping the SGST component the same. Mere including excluded items (major revenue-generating commodities) in the GST tax slab would not increase revenue because tax credits reduce the tax collection and those are collected anyway.

She further also suggested that when Union governments can propose to states that the principal amount of borrowings will be paid out by compensation cess, then it is possible for Union government to borrow themselves from the same resources at lower interest rates, which can be spread among states at a reasonable rate of interests. Prof Rao also highlighted that more expenditure needs to be made in non-capital intensive sectors and activities for funds to reach the hands of the poor, and not on bridges and infrastructure at this time.

Mr T K Arun, Editor, The Economic Times, said highlighted that any compensation mechanism involves injury, an injured party, and the party responsible for providing compensation. In the present case, the Union government expects the state governments – the injured party – to compensate themselves. This situation is becoming a “repentance” for states for accepting the GST regime.

By forcing state governments to borrow to meet their revenue shortfall would effectively increase the burden on the economy in coming years as they will get trapped in the debt spiral. Moreover, the tax to GDP ratio is lower than 16% and after the introduction of GST, the proportion of indirect taxes on GDP has remained unchanged (around 9% of GDP), which means the tax burden has never gone up or gone down, though the tax collections should have been increased. 

He pointed out that many products such as petroleum, tobacco, alcohol, power which are major revenue earners are left out of the GST tax slab. Revenue potentials of GST could be enhanced by bringing all these products into the GST network, and undertaking a complete tax audit trial for efficacy in overall tax collection, regime, and public finance. It would then be easier to catch hold of the tax evaders. Rigorous audit trail under GST needs to be supplemented with requisite economic analysis, harnessing digital technology like big data analytics, AI.

Dr Suranjali Tandon, Assistant Professor, NIPFP, New Delhi highlighted that recent GDP numbers have shown a contraction of almost 24% with a severe negative impact on tax collections. Among the sectors, real estate and construction have been hit hard followed by the manufacturing sector. Only the agricultural sector has experienced positive growth of 3.5%.

This implies that the GST burden will be carried out by certain sectors. She stated that IGST numbers are severely affected and e-way bill numbers are not back to pre-COVID levels, signifying a lack of movement across the states. And further implies that certain states will be severely affected.

Therefore, their compensation as well as borrowing requirements will be different. Dr Tandon, in conformity with the views of the panellists, argued for borrowing by the Union government and allocating the same among the states as per their requirements and not to focus on FRBM clauses at these challenging times for speedy recovery.

Dr Arjun Kumar, director, IMPRI, underscored that the impending GST compensations to State governments need to made available sooner to effectively stimulate aggregate demand, in the spirit of the cooperative and fiscal federalism, especially during the pandemic and recession. Further delays would not minimize the collateral losses and only make the situation worse for the economy and GST system, getting to a situation that can be called – too late too little.

In all the major economies around the world such as the USA, China, the national governments through various means are making timely funds/loans available to sub-national governments, often generously keeping away the capacity utilization and other bottlenecks. The GST system is undoubtedly one of the major reform stories, nearly doubling the GST registered entities to around 1.1 crores.

 However, it requires further reconstruction to enable ease of doing business and ease of living, especially focusing on improvements such as simplification of filling processes, e-way billing, e-invoicing, rationalization of slabs for many products, enabling IT user face and digital infrastructure, economic analyses, data analytics, etc. The current GST conundrum, pandemic and recession, clearly is more than a short term and a rather medium-term challenge. 

To overcome this situation, the coordinated efforts of the centre and state governments in the federal system are necessary, nonetheless, the sufficient ingredient would be instilling trust and confidence among each other towards realizing the vision of a $ 5 trillion economy, New India, and #AtmaNirbharBharat.   

 

You must be to comment.

More from IMPRI Impact and Policy Research Institute

Similar Posts

By IMPRI Impact and Policy Research Institute

By Sumbulkhan Khan

By IMPRI Impact and Policy Research Institute

Wondering what to write about?

Here are some topics to get you started

Share your details to download the report.









We promise not to spam or send irrelevant information.

Share your details to download the report.









We promise not to spam or send irrelevant information.

An ambassador and trained facilitator under Eco Femme (a social enterprise working towards menstrual health in south India), Sanjina is also an active member of the MHM Collective- India and Menstrual Health Alliance- India. She has conducted Menstrual Health sessions in multiple government schools adopted by Rotary District 3240 as part of their WinS project in rural Bengal. She has also delivered training of trainers on SRHR, gender, sexuality and Menstruation for Tomorrow’s Foundation, Vikramshila Education Resource Society, Nirdhan trust and Micro Finance, Tollygunj Women In Need, Paint It Red in Kolkata.

Now as an MH Fellow with YKA, she’s expanding her impressive scope of work further by launching a campaign to facilitate the process of ensuring better menstrual health and SRH services for women residing in correctional homes in West Bengal. The campaign will entail an independent study to take stalk of the present conditions of MHM in correctional homes across the state and use its findings to build public support and political will to take the necessary action.

Saurabh has been associated with YKA as a user and has consistently been writing on the issue MHM and its intersectionality with other issues in the society. Now as an MHM Fellow with YKA, he’s launched the Right to Period campaign, which aims to ensure proper execution of MHM guidelines in Delhi’s schools.

The long-term aim of the campaign is to develop an open culture where menstruation is not treated as a taboo. The campaign also seeks to hold the schools accountable for their responsibilities as an important component in the implementation of MHM policies by making adequate sanitation infrastructure and knowledge of MHM available in school premises.

Read more about his campaign.

Harshita is a psychologist and works to support people with mental health issues, particularly adolescents who are survivors of violence. Associated with the Azadi Foundation in UP, Harshita became an MHM Fellow with YKA, with the aim of promoting better menstrual health.

Her campaign #MeriMarzi aims to promote menstrual health and wellness, hygiene and facilities for female sex workers in UP. She says, “Knowledge about natural body processes is a very basic human right. And for individuals whose occupation is providing sexual services, it becomes even more important.”

Meri Marzi aims to ensure sensitised, non-discriminatory health workers for the needs of female sex workers in the Suraksha Clinics under the UPSACS (Uttar Pradesh State AIDS Control Society) program by creating more dialogues and garnering public support for the cause of sex workers’ menstrual rights. The campaign will also ensure interventions with sex workers to clear misconceptions around overall hygiene management to ensure that results flow both ways.

Read more about her campaign.

MH Fellow Sabna comes with significant experience working with a range of development issues. A co-founder of Project Sakhi Saheli, which aims to combat period poverty and break menstrual taboos, Sabna has, in the past, worked on the issue of menstruation in urban slums of Delhi with women and adolescent girls. She and her team also released MenstraBook, with menstrastories and organised Menstra Tlk in the Delhi School of Social Work to create more conversations on menstruation.

With YKA MHM Fellow Vineet, Sabna launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society. As a start, the campaign aims to begin conversations on menstrual health with five hundred adolescents and youth in Delhi through offline platforms, and through this community mobilise support to create Period Friendly Institutions out of educational institutes in the city.

Read more about her campaign. 

A student from Delhi School of Social work, Vineet is a part of Project Sakhi Saheli, an initiative by the students of Delhi school of Social Work to create awareness on Menstrual Health and combat Period Poverty. Along with MHM Action Fellow Sabna, Vineet launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society.

As a start, the campaign aims to begin conversations on menstrual health with five hundred adolescents and youth in Delhi through offline platforms, and through this community mobilise support to create Period Friendly Institutions out of educational institutes in the city.

Find out more about the campaign here.

A native of Bhagalpur district – Bihar, Shalini Jha believes in equal rights for all genders and wants to work for a gender-equal and just society. In the past she’s had a year-long association as a community leader with Haiyya: Organise for Action’s Health Over Stigma campaign. She’s pursuing a Master’s in Literature with Ambedkar University, Delhi and as an MHM Fellow with YKA, recently launched ‘Project अल्हड़ (Alharh)’.

She says, “Bihar is ranked the lowest in India’s SDG Index 2019 for India. Hygienic and comfortable menstruation is a basic human right and sustainable development cannot be ensured if menstruators are deprived of their basic rights.” Project अल्हड़ (Alharh) aims to create a robust sensitised community in Bhagalpur to collectively spread awareness, break the taboo, debunk myths and initiate fearless conversations around menstruation. The campaign aims to reach at least 6000 adolescent girls from government and private schools in Baghalpur district in 2020.

Read more about the campaign here.

A psychologist and co-founder of a mental health NGO called Customize Cognition, Ritika forayed into the space of menstrual health and hygiene, sexual and reproductive healthcare and rights and gender equality as an MHM Fellow with YKA. She says, “The experience of working on MHM/SRHR and gender equality has been an enriching and eye-opening experience. I have learned what’s beneath the surface of the issue, be it awareness, lack of resources or disregard for trans men, who also menstruate.”

The Transmen-ses campaign aims to tackle the issue of silence and disregard for trans men’s menstruation needs, by mobilising gender sensitive health professionals and gender neutral restrooms in Lucknow.

Read more about the campaign here.

A Computer Science engineer by education, Nitisha started her career in the corporate sector, before realising she wanted to work in the development and social justice space. Since then, she has worked with Teach For India and Care India and is from the founding batch of Indian School of Development Management (ISDM), a one of its kind organisation creating leaders for the development sector through its experiential learning post graduate program.

As a Youth Ki Awaaz Menstrual Health Fellow, Nitisha has started Let’s Talk Period, a campaign to mobilise young people to switch to sustainable period products. She says, “80 lakh women in Delhi use non-biodegradable sanitary products, generate 3000 tonnes of menstrual waste, that takes 500-800 years to decompose; which in turn contributes to the health issues of all menstruators, increased burden of waste management on the city and harmful living environment for all citizens.

Let’s Talk Period aims to change this by

Find out more about her campaign here.

Share your details to download the report.









We promise not to spam or send irrelevant information.

A former Assistant Secretary with the Ministry of Women and Child Development in West Bengal for three months, Lakshmi Bhavya has been championing the cause of menstrual hygiene in her district. By associating herself with the Lalana Campaign, a holistic menstrual hygiene awareness campaign which is conducted by the Anahat NGO, Lakshmi has been slowly breaking taboos when it comes to periods and menstrual hygiene.

A Gender Rights Activist working with the tribal and marginalized communities in india, Srilekha is a PhD scholar working on understanding body and sexuality among tribal girls, to fill the gaps in research around indigenous women and their stories. Srilekha has worked extensively at the grassroots level with community based organisations, through several advocacy initiatives around Gender, Mental Health, Menstrual Hygiene and Sexual and Reproductive Health Rights (SRHR) for the indigenous in Jharkhand, over the last 6 years.

Srilekha has also contributed to sustainable livelihood projects and legal aid programs for survivors of sex trafficking. She has been conducting research based programs on maternal health, mental health, gender based violence, sex and sexuality. Her interest lies in conducting workshops for young people on life skills, feminism, gender and sexuality, trauma, resilience and interpersonal relationships.

A Guwahati-based college student pursuing her Masters in Tata Institute of Social Sciences, Bidisha started the #BleedwithDignity campaign on the technology platform Change.org, demanding that the Government of Assam install
biodegradable sanitary pad vending machines in all government schools across the state. Her petition on Change.org has already gathered support from over 90000 people and continues to grow.

Bidisha was selected in Change.org’s flagship program ‘She Creates Change’ having run successful online advocacy
campaigns, which were widely recognised. Through the #BleedwithDignity campaign; she organised and celebrated World Menstrual Hygiene Day, 2019 in Guwahati, Assam by hosting a wall mural by collaborating with local organisations. The initiative was widely covered by national and local media, and the mural was later inaugurated by the event’s chief guest Commissioner of Guwahati Municipal Corporation (GMC) Debeswar Malakar, IAS.

Sign up for the Youth Ki Awaaz Prime Ministerial Brief below